Posted: Wednesday, June 12, 2013 3:56 PM ET
Index funds and target-date funds are two of the easiest ways to invest in the market. Both have lower fees than a lot of actively managed funds while also being broadly diversified.
Given that, it is not surprising that a lot of investors have opted to park their cash in index funds. With an unpredictable market, a lot of investors find it easier to sleep at night with their money sitting in an index fund as opposed to trying to pick out the winning stocks from the vast universe of publicly traded companies.
Using index funds is a great option because with one simple trade you can buy hundreds of stocks, and only have to worry about the one position. The idea is simple… if the market goes up so does your portfolio. You remove the risk of having one specific stock implode and ruin your overall portfolio.
Another reason other than the reduced expense of diversification that appeals to many investors is that it simply takes less homework. You don't have to sort through a universe of stocks to try to figure out which ones are going to trade higher and which ones are hitting a peak. You simply need to ask yourself if you believe the markets will trade higher in the long run. If your answer to that question is yes, then you can buy an index fund and just sit back and wait for the market to do its thing.
Target-date funds take this simplicity one-step further, moving from stocks to bonds as an investor ages, and also taking care of the periodic rebalancing that multi-asset portfolio requires.
These investments are great for prudent and patient investors, but some investors shy from them because they don't offer the potential for huge paydays. You have to consider that higher risk leads to higher rewards, so you are sacrificing the potential for huge jumps in order to minimize your risk. It is up to you to decide how much risk you are willing to accept.
While investors have embraced index funds in recent years, it is somewhat surprising to hear a mutual fund manager support the use of index funds since they collect higher fees from investors who choose actively managed funds and move between funds regularly.
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